IDB Forecasts Economic Slowdown in Latin America in 2023

The Inter-American Development Bank (IDB) provided numerous recommendations for central banks and countries in Latin America and Caribbean with the goal of allowing these countries to face inflationary shocks. The bank also forecasted economic slowdowns in 2023. 

The IDB urged Latin American and Caribbean countries to urgently implement measures to reduce inflation and public debt in 2023 in its Preparing the Macroeconomic Terrain for Renewed Growth Report. IDB explained that the region's countries must address growing social demands, limited fiscal resources and low productivity and growth.

The report forecasts that the region could grow by 1% in 2023, highlighting that an unexpected 3.9% growth in 2022 outperformed previous estimates. For 2024, IDB forecasts a growth scenario of 1.9% if the US evades a recession and global inflation falls back. 

The Russian invasion of Ukraine wreaked havoc in the global economy, as commodity prices soared, growth expectations plummeted and central banks were forced to increase interest rates to control inflationary pressures. The war brought economic and financial uncertainty, which severely affected Latin American and Caribbean countries with high financing costs. 

“As the world adjusts to the consequences of overlapping shocks, many risks have appeared on the economic horizon for Latin America and the Caribbean. Policymakers need to navigate these waters carefully by coordinating the right mix of monetary, fiscal, financial and other relevant economic measures to return to a path of sustained economic growth,” says Eric Parrado, Chief Executive, IDB. 

The IDB explained that countries will have to maintain or tighten monetary policy stances for inflation to reach their 2024 targets. In Latin America, the median annual inflation rate hit 9.6% in July 2022, which was the highest since the 2008 global financial crisis. However, the IDB highlighted that inflation has fallen after that peak in most countries in the region. The report explained that inflation continues to remain high in the region and that central banks have to ensure their independence to control inflation.  

The report highlights that short-term policies must be implemented to reduce the impact on vulnerable populations, while medium and long-term policies will have to focus on stimulating investments for digital and physical infrastructure. The report explained that improving labor markets and reducing incentives for informality will provide healthy growth levels. 

IDB also indicates that as central banks focus on reducing inflation, economies in the region will likely slowdown. Fiscal policy plans must increase their expenditure efficiency and tax collection policies to manage debts, as the report forecasts that sovereign debt could grow. 

“IDB studies recommend that governments in the region reduce public debt ratios to a prudent range of 46-55% of GDP. The report recommends that countries take advantage of long-term financing from multilateral development banks to improve their debt composition. Exchanging expensive short-term debt for long-term debt at lower costs would benefit many of them,” reads the report.